<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PERFORMANCE RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE TOTAL RETURN/1/
-------------------------- -----------------------------
12 MONTHS 6 MONTHS
01/31/96 07/31/95 01/31/95 ENDED 01/31/96 ENDED 01/31/96
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $8.99 $9.07 $8.60 15.27% 4.48%
- ---------------------------------------------------------------------------
Class B Shares 8.98 9.07 8.60 14.37 4.04
- ---------------------------------------------------------------------------
Class C Shares/2/ 8.98 9.07 8.60 14.63 4.14
- ---------------------------------------------------------------------------
</TABLE>
PERFORMANCE SUMMARY CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/3/ RETURN/1/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 - 12/31/94 $10.00 $ 8.56 $-- $0.5792 -8.76%
- --------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.9392 14.12
- --------------------------------------------------------------------------------
01/01/96 - 01/31/96 8.79 8.99 -- -- 2.28
- --------------------------------------------------------------------------------
Totals: $0.0000 $1.5184
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/96: 6.50%
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS B SHARES
<CAPTION>
NET ASSET VALUE
----------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/3/ RETURN/1/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 - 12/31/94 $10.00 $ 8.55 $-- $0.5242 -9.41%
- --------------------------------------------------------------------------------
1995 8.55 8.78 -- 0.8733 13.29
- --------------------------------------------------------------------------------
01/01/96 - 01/31/96 8.78 8.98 -- -- 2.28
- --------------------------------------------------------------------------------
Totals: $0.0000 $1.3975
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/96: 4.97%
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY CLASS C SHARES/2/
<CAPTION>
NET ASSET VALUE
----------------- CAPITAL GAINS TOTAL
PERIOD COVERED BEGINNING ENDING DISTRIBUTED DIVIDENDS PAID/3/ RETURN/1/
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
02/07/94 - 12/31/94 $10.00 $ 8.56 $-- $0.5424 -9.13%
- --------------------------------------------------------------------------------
1995 8.56 8.79 -- 0.8951 13.56
- --------------------------------------------------------------------------------
01/01/96 - 01/31/96 8.79 8.98 -- -- 2.16
- --------------------------------------------------------------------------------
Totals: $0.0000 $1.4375
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN AS OF 01/31/96: 5.43%
- --------------------------------------------------------------------------------
</TABLE>
1 Figures assume reinvestment of all dividends and other distributions at net
asset value on the payable dates and do not include sales charges; results
for each class would be lower if sales charges were included.
2 Formerly Class D shares
3 Includes foreign exchange gain distributions, if any.
The data above represents past performance of the Fund's shares, which is no
guarantee of future results. The investment return and principal value of an
investment in the Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
1
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
PORTFOLIO OF INVESTMENTS JANUARY 31, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000)* DATES RATES VALUE
--------- -------------------- ---------------- -----------
<C> <S> <C> <C> <C>
GLOBAL DEBT SECURITIES - 44.05%
Brazil - 4.84%
US$ 3,000 Federal Republic of
Brazil Par Bonds....... 04/15/24 4.250%(b) $ 1,702,500
US$ 2,600 Federal Republic of
Brazil DCB............. 04/15/12 6.875++++ 1,670,500
-----------
3,373,000
-----------
Canada - 2.21%
2,100 Province of Ontario..... 01/19/06 7.500 1,543,178
-----------
Finland - 1.07%
3,000 Government of Finland... 03/15/04 9.500 748,503
-----------
Germany - 7.57%
7,500 Federal Republic of
Germany................ 01/03/05 to 01/04/24 6.250 to 7.375 5,280,652
-----------
Mexico - 4.35%
US$ 4,000 United Mexican States
Collateralized Notes,
Discount Bonds(1)...... 12/31/19 6.609 to 6.766++++ 3,035,000
-----------
Netherlands - 4.74%
4,700 Government of
Netherlands............ 09/15/01 8.750 3,303,099
-----------
New Zealand - 3.09%
2,340 Government of New
Zealand................ 07/15/97 10.000 1,622,156
740 International Bank of
Reconstruction and
Development(2)......... 07/25/97 12.500 529,799
-----------
2,151,955
-----------
Poland - 3.37%
US$ 3,000 Republic of Poland PDI.. 10/27/14 3.750(b) 2,347,500
-----------
Spain - 8.51%
688,000 Government of Spain..... 08/30/98 to 03/25/00 11.450 to 12.250 5,937,939
-----------
United Kingdom - 4.30%
1,650 United Kingdom Gilt..... 07/14/00 to 09/08/03 10.000 to 13.000 2,995,551
-----------
Total Global Debt Securities (cost -
$28,442,934)...................... 30,716,377
-----------
HIGH YIELD SECURITIES - 50.83%
CORPORATE BONDS - 49.32%
Aerospace - 2.00%
1,500 GPA Holland BV.......... 08/16/99 9.000 1,395,000
-----------
Airlines - 0.54%
750# USAfrica Airways,
Inc.++................. 05/31/99 12.000(a) 375,000
-----------
Cable - 2.93%
1,500# Australis Media Ltd. ... 05/15/03 14.000+ 1,117,500
1,500 Telewest PLC............ 10/01/07 11.000+ 922,500
-----------
2,040,000
-----------
Communications - 5.63%
1,000 Echostar Communications. 06/01/04 12.875+ 745,000
110(3) GST
Telecommunications**... 12/15/05 13.875+ 574,750
150 Intelcom Group USA,
Inc. .................. 09/15/05 13.500+ 92,625
500 IXC Communications
Inc.**................. 10/01/05 13.000 525,000
900 MFS Communications...... 01/15/06 8.875+ 590,625
500 PageMart Nationwide
Inc.................... 02/01/05 15.000+ 336,250
2,000 Viatel Inc.............. 01/15/05 15.000+ 1,060,000
-----------
3,924,250
-----------
</TABLE>
2
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- ------------------ -------- -----------
<C> <S> <C> <C> <C>
HIGH YIELD SECURITIES - (CONTINUED)
CORPORATE BONDS - (CONTINUED)
Consumer Manufacturing - 4.03%
$ 900 Apparel Ventures, Inc. . 12/31/00 12.250% $ 706,500
1,153 Chattem Inc. ........... 06/15/04 12.750 1,115,527
1,000 Decorative Home Accents. 06/30/02 13.000 990,000
-----------
2,812,027
-----------
Energy - 1.98%
1,350 TransTexas Gas Corp. ... 06/15/02 11.500 1,383,750
-----------
Entertainment - 0.72%
United Artists Theatre
500 Circuit................ 07/01/15 9.300 501,250
-----------
Financial Services - 1.36%
Imperial Credit
1,000 Industries............. 01/15/04 9.750 950,000
-----------
Food & Beverage - 4.67%
1,000 Flagstar Corp. ......... 12/01/02 10.875 902,500
3,000 Iowa Select Farms++..... 02/15/04 17.250+ 1,305,651
Specialty Equipment
1,000 Companies Inc. ........ 12/01/03 11.375 1,047,500
-----------
3,255,651
-----------
Gaming - 6.45%
Fitzgeralds Gaming
1,000 Corp. ................. 12/31/02 13.000 935,080
Grand Palais Casino,
1,207# Inc. ++................ 11/01/97 18.250(a) 0
3,469# Hemmeter Enterprises**.. 12/15/00 12.000(a) 1,491,478
2,000 PRT Funding Inc. ....... 04/15/04 11.625 1,540,000
Sam Houston Race Park
1,009 Ltd. .................. 09/01/01 11.000 529,973
-----------
4,496,531
-----------
General Industrial - 4.70%
1,000 Alpine Group............ 07/15/03 12.250 980,000
1,000 Jordan Industries....... 08/01/05 11.750+ 635,000
Kindercare Learning
1,000 Centers................ 06/01/01 10.375 1,062,500
750 Poindexter JB Inc. ..... 05/15/04 12.500 600,000
-----------
3,277,500
-----------
Media - 4.62%
2,000 Affiliated Newspapers... 07/01/06 13.250+ 1,270,000
KIII Communications
1,000 Corp. ................. 02/01/06 8.500 1,003,750
1,000 NeoData Services Inc. .. 05/01/03 12.000+ 950,000
-----------
3,223,750
-----------
Packaging - 0.37%
Grupo Industrial Durango
275 S.A. .................. 07/15/01 12.000 261,250
-----------
Retail - 3.41%
1,000 Pamida Inc. ............ 03/15/03 11.750 740,000
Petro PSC Properties
1,000 L.P. .................. 06/01/02 12.500 960,000
1,000 Wickes Lumber Co. ...... 12/15/03 11.625 675,000
-----------
2,375,000
-----------
Supermarkets & Drugstores - 1.33%
1,200 Di Giorgio Corp. ....... 02/15/03 12.000 924,000
-----------
</TABLE>
3
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
--------- ------------------ -------- -----------
<C> <S> <C> <C> <C>
HIGH YIELD SECURITIES - (CONCLUDED)
CORPORATE BONDS - (CONCLUDED)
Transport Non-Air - 4.58%
$1,000 Gearbulk Holding Ltd. .... 12/01/04 11.250% $ 1,082,500
1,000 TNT Transport Europe PLC.. 04/15/04 11.500 1,060,000
Viking Star Shipping
1,000 Inc. .................... 07/15/03 9.625 1,050,000
-----------
3,192,500
-----------
Total Corporate Bonds (cost -
$37,741,180)....................... 34,387,459
-----------
<CAPTION>
NUMBER
OF
SHARES
------
<C> <S> <C> <C> <C>
COMMON STOCK (A) - 0.59%
Communications - 0.40%
72,200 Viatel Inc............................................. 281,580
-----------
Gaming - 0.10%
298 SHRP Equity Inc. ...................................... 70,030
-----------
Media - 0.09%
2,000 Affiliated Newspapers.................................. 60,000
-----------
Total Common Stock (cost - $393,470)............................. 411,610
-----------
<CAPTION>
NUMBER
OF
WARRANTS
--------
<C> <S> <C> <C> <C>
WARRANTS (A) - 0.92%
Communications - 0.03%
2,625 PageMart Nationwide Inc................................ 23,625
-----------
Consumer Manufacturing - 0.31%
1,280 Chattem Inc............................................ 4,800
1,000 Decorative Home Accents................................ 10,000
2,000 Icon Health & Fitness.................................. 200,000
-----------
214,800
-----------
Food & Beverage - 0.35%
30,000 Iowa Select Farms++.................................... 243,240
-----------
Homebuilding - 0.01%
7,900 Peters JM Inc.......................................... 5,925
-----------
Media - 0.01%
1,000 AVI Holdings Inc....................................... 5,000
-----------
Packaging - 0.11%
1,000 Data Documents Inc..................................... 80,000
-----------
Retail - 0.10%
2,000 Petro PSC Properties L.P. ............................. 68,000
-----------
Total Warrants (cost - $390,405)................................. 640,590
-----------
Total High Yield Securities (cost - $38,525,055)................. 35,439,659
-----------
</TABLE>
4
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATE RATE VALUE
--------- ------------------ -------- -----------
<C> <S> <C> <C> <C>
REPURCHASE AGREEEMENT - 0.34%
$240 Repurchase Agreement dated
01/31/96, with State
Street Bank and Trust
Company, collateralized
by $174,174 U.S. Treasury
Bonds, 9.250% due
02/15/16; proceeds:
$240,033 (cost -
$240,000)............... 02/01/96 5.000% $ 240,000
-----------
Total Investments (cost -
$67,207,989)-95.22%................ 66,396,036
Other assets in excess of
liabilities-4.78%................... 3,329,865
-----------
Net Assets - 100.00%................. $69,725,901
===========
</TABLE>
- -------
Note: The global debt section of the portfolio of investments is listed by the
issuer's country of origin.
* Global debt securities are in local currency unless otherwise indicated
** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# Security represents a unit which is composed of the stated bond with
attached warrants or common stock
+ Denotes a step-up bond or a zero coupon bond that converts to the noted
fixed rate at a designated future date
++ Illiquid securities representing 2.9% of portfolio assets
++++ Interest rate varies with the London Interbank Offered Rate (LIBOR)
(a) Non-income producing security
(b) Reflects rate at January 31, 1996 on step coupon rate instruments
(1) With an additional 6,154,000 recoverable rights attached maturing on
06/30/03 with no market value
(2) "Supranational" security denominated in New Zealand Dollars
(3) Represents 110 units. Each unit consists of eight senior discount notes and
one convertible senior subordinated discount note.
DCB Debt Conversion Bond
PDI Past Due Interest
FORWARD FOREIGN CURRENCY CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT TO IN EXCHANGE APPRECIATION
DELIVER FOR MATURITY DATE (DEPRECIATION)
----------- ------------ -------------------- --------------
<S> <C> <C> <C> <C>
Belgian Francs.......... 77,810,200 US$2,689,138 09/30/96 $116,762
British Pounds.......... 1,100,000 US$1,699,555 04/12/96 41,513
Finnish Markkas......... 16,000,000 US$3,591,221 03/18/96 to 04/26/96 73,708
New Zealand Dollars..... 1,550,000 US$1,003,160 02/05/96 (39,609)
Spanish Pesetas......... 670,425,000 US$5,452,649 02/12/96 to 03/21/96 128,850
U.S. Dollars............ 833,255 FIM3,599,662 03/18/96 (42,451)
--------
$278,773
========
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES JANUARY 31, 1996
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost - $67,207,989)......... $66,396,036
Cash denominated in foreign currencies (cost - $439,029)......... 426,521
Interest receivable.............................................. 1,409,437
Receivable for investments sold.................................. 3,007,376
Receivable for shares of beneficial interest sold................ 143,920
Deferred organization costs...................................... 180,874
Unrealized appreciation on forward foreign currency contracts.... 360,833
Other assets..................................................... 74,686
-----------
Total assets................................................. 71,999,683
-----------
Liabilities
Payable for investments purchased................................ 1,542,809
Payable for shares of beneficial interest repurchased............ 425,930
Payable to affiliates............................................ 94,744
Unrealized depreciation on forward foreign currency contracts.... 82,060
Accrued expenses and other liabilities........................... 128,239
-----------
Total liabilities............................................ 2,273,782
-----------
Net Assets
Beneficial interest - $0.001 par value (unlimited amount
authorized)..................................................... 79,251,158
Distributions in excess of net investment income................. (252,718)
Accumulated net realized losses from investment transactions..... (8,706,415)
Net unrealized depreciation of investments, other assets,
liabilities and forward contracts denominated in foreign
currencies...................................................... (566,124)
-----------
Net assets....................................................... $69,725,901
===========
Class A:
Net assets....................................................... $ 9,841,458
-----------
Shares outstanding............................................... 1,094,957
-----------
Net asset and redemption value per share......................... $8.99
===========
Maximum offering price per share (net asset value plus sales
charge of 4.00% of offering price).............................. $9.36
===========
Class B:
Net assets....................................................... $40,652,884
-----------
Shares outstanding............................................... 4,528,525
-----------
Net asset value and offering price per share..................... $8.98
===========
Class C:
Net assets....................................................... $19,231,559
-----------
Shares outstanding............................................... 2,141,006
-----------
Net asset value and offering price per share..................... $8.98
===========
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JANUARY 31, 1996
<TABLE>
<S> <C>
Investment Income:
Interest............................................................ $7,472,243
----------
Expenses:
Investment advisory and administration.............................. 546,119
Service fees - Class A.............................................. 25,887
Service and distribution fees - Class B............................. 415,659
Service and distribution fees - Class C............................. 156,716
Custody and accounting.............................................. 110,632
Reports and notices to shareholders................................. 109,106
Legal and audit..................................................... 101,850
Transfer agency and service fees.................................... 70,515
State registration.................................................. 61,862
Amortization of organizational expenses............................. 60,000
Trustees' fees...................................................... 2,750
Other expenses...................................................... 21,895
----------
1,682,991
----------
Net investment income............................................... 5,789,252
----------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions............................................ (2,123,711)
Foreign currency transactions...................................... 542,636
Net change in unrealized appreciation/depreciation of:
Investments........................................................ 5,491,298
Other assets, liabilities and forward contracts denominated in
foreign currencies................................................ 199,054
----------
Net realized and unrealized gains from investment activities........ 4,109,277
----------
Net increase in net assets resulting from operations................ $9,898,529
==========
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR FEBRUARY 7, 1994+
ENDED THROUGH
JANUARY 31, 1996 JANUARY 31, 1995
---------------- -----------------
<S> <C> <C>
From operations:
Net investment income...................... $ 5,789,252 $ 6,126,030
Net realized losses from investment
transactions.............................. (2,123,711) (6,582,704)
Net realized gains (losses) from foreign
currency transactions..................... 542,636 (524,965)
Net change in unrealized
appreciation/depreciation of investments.. 5,491,298 (6,303,251)
Net change in unrealized
appreciation/depreciation of other assets,
liabilities and forward contracts
denominated in foreign currencies......... 199,054 46,775
------------ ------------
Net increase (decrease) in net assets
resulting from operations................. 9,898,529 (7,238,115)
------------ ------------
Dividends and distributions to shareholders
from:
Net investment income - Class A............ (904,512) (948,784)
Net investment income - Class B............ (3,321,067) (2,794,312)
Net investment income - Class C............ (1,724,956) (1,715,898)
Net realized gains from foreign currency
transactions - Class A.................... (106,596) --
Net realized gains from foreign currency
transactions - Class B.................... (456,125) --
Net realized gains from foreign currency
transactions - Class C.................... (216,547) --
------------ ------------
(6,729,803) (5,458,994)
------------ ------------
From beneficial interest transactions:
Net proceeds from the sale of shares....... 18,385,013 126,493,961
Cost of shares repurchased................. (28,444,356) (43,919,018)
Proceeds from dividends reinvested......... 3,549,276 3,189,378
------------ ------------
Net increase (decrease) in net assets from
beneficial interest transactions.......... (6,510,067) 85,764,321
------------ ------------
Net increase (decrease) in net assets...... (3,341,341) 73,067,212
Net assets:
Beginning of period........................ 73,067,242 30
------------ ------------
End of period (including undistributed net
investment income of $142,071 at January
31, 1995)................................. $ 69,725,901 $ 73,067,242
============ ============
</TABLE>
- -------
+ Commencement of operations.
See accompanying notes to financial statements
8
<PAGE>
PAINEWEBBER NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
PaineWebber Securities Trust ("Trust") was organized under Massachusetts law by
a Declaration of Trust dated December 3, 1992 and is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as an open-end, diversified investment company. The Trust is a series
mutual fund with two funds: PaineWebber Strategic Income Fund (the "Fund") and
PaineWebber Small Cap Value Fund. The financial statements of PaineWebber Small
Cap Value Fund are not included herein.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Fund management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is
a summary of significant accounting policies:
Organizational Matters - Costs incurred by the Fund in connection with its
organization and the registration of its shares have been deferred and are
being amortized using the straight-line method over a period not to exceed 60
months from the commencement of operations.
Currently, the Fund offers Class A, Class B and Class C (formerly Class D)
shares. Effective November 10, 1995, the Fund began using industry standardized
nomenclature and Class D shares were renamed Class C shares. Each Class
represents interests in the same assets of the Fund, and the classes are
identical except for differences in their sales charge structures, ongoing
service and distribution charges and certain transfer agency expenses. In
addition, Class B shares and all corresponding reinvested dividend shares
automatically convert to Class A shares approximately six years after issuance.
All classes of shares have equal voting privileges except that each class has
exclusive voting rights with respect to its distribution plan.
Valuation of Investments - Securities which are listed on U.S. and foreign
stock exchanges are valued at the last sale price on the day the securities are
being valued or, lacking any sales on such day, at the last available bid
price. In cases where securities are traded on more than one exchange, the
securities are valued on the exchange designated by Mitchell Hutchins as the
primary market. Securities traded in the over-the-counter ("OTC") market and
listed on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") are valued at the last trade price on NASDAQ prior to the
time of valuation; other OTC securities are valued at the last bid price
available in the OTC market prior to the time of valuation. The amortized cost
method of valuation is used to value short-term debt instruments with sixty
days or less remaining to maturity. Securities and assets for which market
quotations are not readily available
9
<PAGE>
PAINEWEBBER
(including restricted securities subject to limitations as to their sale) are
valued at fair value as determined in good faith by or under the direction of
the Trust's board of trustees. All investments quoted in foreign currencies
will be valued daily in U.S. dollars on the basis of the foreign currency
exchange rates prevailing at the time such valuation is determined by the
Fund's custodian.
Foreign currency exchange rates are generally determined prior to the close of
the New York Stock Exchange ("NYSE"). Occasionally, events affecting the value
of foreign investments and such exchange rates occur between the time at which
they are determined and the close of the NYSE, which will not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of such securities or currency exchange rates occurred during such
time period, the securities will be valued at their fair value as determined in
good faith by or under the direction of the Trust's board of trustees.
Repurchase Agreements - The Fund's custodian takes possession of the collateral
pledged for investments in repurchase agreements. The underlying collateral is
valued daily on a mark-to-market basis to ensure that the value, including
accrued interest, is at least equal to the repurchase price. In the event of
default of the obligation to repurchase, the Fund has the right to liquidate
the collateral and apply the proceeds in satisfaction of the obligation. Under
certain circumstances, in the event of default or bankruptcy by the other party
to the agreement, realization and/or retention of the collateral may be subject
to legal proceedings. The Fund occasionally participates in joint repurchase
agreement transactions with other funds managed by Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), a wholly owned subsidiary of PaineWebber
Incorporated ("PaineWebber") and investment adviser and administrator of the
Fund.
Investment Transactions and Investment Income - Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions and foreign exchange transactions are calculated using the
identified cost method. Interest income is recorded on an accrual basis.
Discounts are accreted and premiums are amortized as adjustments to interest
income and the identified cost of investments.
Income, expenses (excluding class-specific expenses) and realized/unrealized
gains/losses are allocated proportionately to each class of shares based upon
the relative net asset value of outstanding shares (or the value of dividend-
eligible shares, as appropriate) of each class at the beginning of the day
(after adjusting for current capital share activity of the respective classes).
Class-specific expenses are charged directly to the applicable class of shares.
10
<PAGE>
PAINEWEBBER
Foreign Currency Translation - The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(1) market value of investment securities, other assets and liabilities -
at the exchange rates prevailing at the end of the period.
(2) purchases and sales of investment securities, income and expenses - at
the rates of exchange prevailing on the respective dates of such
transactions.
Although the net assets and the market values of the Fund are presented at the
foreign exchange rates at the close of the period, the Fund does not generally
isolate the effect of fluctuations in foreign exchange rates from the effect of
the changes in market prices of securities. However, the Fund does isolate the
effect of fluctuations in foreign exchange rates when determining the gain or
loss upon the sale or maturity of foreign currency-denominated debt obligations
pursuant to federal income tax regulations.
Forward Foreign Currency Contracts - The Fund may enter into forward foreign
currency exchange contracts ("forward contracts") in connection with planned
purchases or sales of securities or to hedge the U.S. dollar value of portfolio
securities denominated in a particular currency.
The Fund has no specific limitation on the percentage of assets which may be
committed to such contracts. The Fund may enter into forward contracts or
maintain a net exposure to forward contracts only if (1) the consummation of
the contracts would not obligate the Fund to deliver an amount of foreign
currency in excess of the value of the position being hedged by such contracts
or (2) the Fund maintains cash, U.S. government securities or liquid, high-
grade debt securities in a segregated account in an amount not less than the
value of its total assets committed to the consummation of the forward
contracts and not covered as provided in (1) above, as marked-to-market daily.
Risks may arise upon entering into forward contracts from the potential
inability of counterparties to meet the terms of their forward contracts and
from unanticipated movements in the value of foreign currencies relative to the
U.S. dollar.
Fluctuations in the value of forward contracts are recorded for book purposes
as unrealized gains or losses by the Fund. Realized gains and losses include
net gains and losses recognized by the Fund on contracts which have matured.
Federal Taxes - The Fund intends to distribute all of its taxable income and to
comply with the other requirements of the Internal Revenue Code applicable to
regulated investment companies. Accordingly, no provision for federal income
taxes is required. In addition, by distributing during each calendar year
substantially all of its net investment income, capital gains and certain other
amounts, if any, the Fund intends not to be subject to a federal excise tax.
11
<PAGE>
PAINEWEBBER
Dividends and Distributions to Shareholders - Dividends and distributions to
shareholders are recorded on the ex-dividend date. The amount of dividends and
distributions are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for financial reporting purposes but not for tax purposes are reported as
dividends in excess of net investment income or distributions in excess of net
realized capital gains. To the extent they exceed net investment income and net
realized capital gains for tax purposes, they are reported as distributions of
paid-in-capital.
CONCENTRATION OF RISK
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with investing in U.S. companies and U.S.
government securities. These risks include revaluation of currencies and future
adverse political and economic developments, which could cause securities and
their markets to be less liquid and prices more volatile than those of
comparable U.S. companies and U.S. government securities.
The ability of the issuers of the debt securities held by the Fund to meet
their obligations may be affected by economic developments, including those
particular to a specific industry, country or region.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust's board of trustees has approved an Investment Advisory and
Administration Contract ("Advisory Contract") with Mitchell Hutchins, under
which Mitchell Hutchins serves as investment adviser and administrator of the
Fund. In accordance with the Advisory Contract, the Fund pays Mitchell Hutchins
an investment advisory and administration fee, which is accrued daily and paid
monthly, at the annual rate of 0.75% of the Fund's average daily net assets. At
January 31, 1996, the Fund owed Mitchell Hutchins $44,377 in investment
advisory and administration fees.
In compliance with applicable state securities laws, Mitchell Hutchins will
reimburse the Fund if and to the extent that the aggregate operating expenses
in any fiscal year, exclusive of taxes, distribution fees, interest, brokerage
fees and extraordinary expenses, exceed limitations imposed by various state
regulations. Currently, the most restrictive limitation applicable to the Fund
is 2.5% of the first $30 million of average daily net assets, 2.0% of the next
$70 million and 1.5% of any excess over $100 million. For the year ended
January 31, 1996, no reimbursements were required pursuant to the above
limitation for the Fund.
12
<PAGE>
PAINEWEBBER
DISTRIBUTION PLANS
Mitchell Hutchins is the distributor of the Fund's shares and has appointed
PaineWebber as the exclusive dealer for the sale of those shares. Under
separate plans of distribution pertaining to Class A, Class B and Class C
(formerly Class D) shares, the Fund pays Mitchell Hutchins monthly service fees
at an annual rate of 0.25% of the average daily net assets of Class A, Class B
and Class C shares and monthly distribution fees at an annual rate of 0.75% and
0.50% of the average daily net assets of Class B shares and Class C shares,
respectively. At January 31, 1996, the Fund owed Mitchell Hutchins $48,816 in
service and distribution fees.
Mitchell Hutchins also receives the proceeds of the initial sales charges paid
by the shareholders upon the purchase of Class A shares and the contingent
deferred sales charges paid by the shareholders upon certain redemptions of
Class A, Class B and Class C shares. Mitchell Hutchins has informed the Fund
that for the year ended January 31, 1996, it earned $52,172 in sales charges.
TRANSFER AGENCY SERVICE FEES
The Fund pays PaineWebber an annual fee of $4.00 per active PaineWebber
shareholder account for certain services not provided by the Fund's transfer
agent. For these services for the year ended January 31, 1996, PaineWebber
earned $19,823 in transfer agency service fees from the Fund. At January 31,
1996, the Fund owed PaineWebber $1,551 for shareholder service fees.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at January 31,
1996 was substantially the same as the cost of securities for financial
statement purposes.
At January 31, 1996, the components of the net unrealized depreciation of
investments were as follows:
<TABLE>
<S> <C>
Gross appreciation (investments having an excess of value over
cost)............................................................ $ 3,862,450
Gross depreciation (investments having an excess of cost over val-
ue).............................................................. (4,674,403)
-----------
Net unrealized depreciation of investments........................ $ (811,953)
===========
</TABLE>
For the year ended January 31, 1996, total aggregate purchases and sales of
portfolio securities, excluding short-term securities, were as follows:
<TABLE>
<S> <C>
Purchases........................................................... $61,666,997
Sales............................................................... $67,886,471
</TABLE>
FEDERAL INCOME TAX STATUS
At January 31, 1996, the Fund had a capital loss carryforward of $7,661,389 of
which $5,396,301 will expire by January 31, 2003 and $2,265,088 will expire by
January 31, 2004. This loss carryforward is available as a reduction, to the
extent
13
<PAGE>
PAINEWEBBER
provided in the regulations, of future net realized capital gains. To the
extent that such losses are used to offset future net realized capital gains,
it is probable these gains will not be distributed.
In accordance with Treasury Regulations, the Fund has elected to defer realized
foreign currency losses of $154,749 and capital losses of $1,045,027 arising
after October 31, 1995. Such losses have been treated for tax purposes as
arising on February 1, 1996.
To reflect reclassifications arising from permanent "book/tax" differences for
the year ended January 31, 1996, beneficial interest was decreased by $3,126,
undistributed/distributions in excess of net investment income was increased by
$545,762 and accumulated net realized gains/losses was decreased by $542,636.
Permanent book/tax differences are primarily attributable to foreign currency
gains/losses.
SHARES OF BENEFICIAL INTEREST
There is an unlimited amount of $0.001 par value shares of beneficial interest
authorized. Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
JANUARY 31, 1996:
Shares sold............. 256,146 $ 2,287,348 1,219,370 $ 10,908,042 580,404 $ 5,189,623
Shares repurchased...... (566,713) (5,056,417) (1,574,328) (14,041,862) (1,046,861) (9,346,077)
Shares converted from
Class B to Class A..... 53,359 481,701 (53,416) (481,701) -- --
Dividends reinvested.... 56,384 500,385 201,919 1,791,441 141,690 1,257,450
---------- ------------ ---------- ------------ ---------- ------------
Net decrease............ (200,824) $ (1,786,983) (206,455) $ (1,824,080) (324,767) $ (2,899,004)
========== ============ ========== ============ ========== ============
FOR THE PERIOD
FEBRUARY 7, 1994+
THROUGH JANUARY 31,
1995:
Shares sold............. 2,333,544 $ 22,940,929 6,519,288 $ 63,804,943 4,030,417 $ 39,748,089
Shares repurchased...... (1,096,175) (10,208,741) (1,947,474) (18,003,645) (1,697,257) (15,706,632)
Dividends reinvested.... 58,411 527,913 163,165 1,466,553 132,612 1,194,912
---------- ------------ ---------- ------------ ---------- ------------
Net increase............ 1,295,780 $ 13,260,101 4,734,979 $ 47,267,851 2,465,772 $ 25,236,369
========== ============ ========== ============ ========== ============
</TABLE>
- -------
+ Commencement of operations.
14
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD IS PRESENTED BELOW:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C**
---------------------------------- ---------------------------------- ----------------------------------
For the Period For the Period For the Period
For the February 7, 1994+ For the February 7, 1994+ For the February 7, 1994+
Year Ended through Year Ended through Year Ended through
January 31, 1996 January 31, 1995 January 31, 1996 January 31, 1995 January 31, 1996 January 31, 1995
---------------- ----------------- ---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of period....... $8.60 $10.00 $8.60 $10.00 $8.60 $10.00
------ ------- ------- ------- ------- -------
Net investment
income........... 0.60 0.74 0.54 0.66 0.55 0.69
Net realized and
unrealized gains
(losses) from
investment and
foreign currency
transactions.... 0.66 (1.49) 0.65 (1.47) 0.66 (1.48)
------ ------- ------- ------- ------- -------
Net increase
(decrease) from
investment
operations...... 1.26 (0.75) 1.19 (0.81) 1.21 (0.79)
------ ------- ------- ------- ------- -------
Dividends from
net investment
income.......... (0.77) (0.65) (0.71) (0.59) (0.73) (0.61)
Distributions
from net
realized gains
from foreign
currency
transactions.... (0.10) -- (0.10) -- (0.10) --
------ ------- ------- ------- ------- -------
Total dividends
and
distributions to
shareholders.... (0.87) (0.65) (0.81) (0.59) (0.83) (0.61)
------ ------- ------- ------- ------- -------
Net asset value,
end
of period....... $8.99 $8.60 $8.98 $8.60 $8.98 $8.60
====== ======= ======= ======= ======= =======
Total investment
return (1)....... 15.27% (7.61)% 14.37% (8.22)% 14.63% (8.02)%
====== ======= ======= ======= ======= =======
Ratios/Supplemental
Data:
Net assets, end
of period
(000's)......... $9,841 $11,148 $40,653 $40,710 $19,232 $21,208
Ratio of expenses
to average net
assets.......... 1.74% 1.49%* 2.49% 2.24%* 2.24% 1.98%*
Ratio of net
investment
income to
average net
assets.......... 8.52% 8.06%* 7.77% 7.46%* 8.03% 7.62%*
Portfolio
turnover rate.... 91% 117% 91% 117% 91% 117%
- ---------------------
</TABLE>
+ Commencement of issuance of shares
* Annualized
** Formerly Class D
(1) Total investment return is calculated assuming a $1,000 investment on the
first day of the period, reinvestment of all dividends and other
distributions at net asset value on the payable dates and a sale at net
asset value on the last day of each period reported. The figures do not
include sales charges; results for each class would be lower if sales
charges were included. Total investment returns for periods of less than
one year have not been annualized.
15
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
PaineWebber Strategic Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of PaineWebber Strategic Income Fund
(the "Fund") at January 31, 1996, the results of its operations for the year
then ended, the changes in its net assets and the financial highlights for the
year then ended and for the period February 7, 1994 (commencement of
operations) through January 31, 1995, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion of these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at January 31, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 22, 1996
16
<PAGE>
PAINEWEBBER STRATEGIC INCOME FUND
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (January
31, 1996), as to the federal tax status of distributions received by
shareholders during such fiscal year. Accordingly, we are advising you that all
of the distributions paid by Strategic Income Fund during the period were
derived from net investment income and net realized gains from foreign currency
transactions and are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need not be
reported as taxable income. Some retirement trusts (e.g., corporate, Keogh and
403(b)(7) plans) may need this information for their annual reporting.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1996. The second notification, which
reflects the amount to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Fund.
17
